Merchant v. The Queen, 84 DTC 6215, [1984] CTC 253 (FCTD)

Reed, J:—This is an appeal from a decision of the Tax Review Board dated April 3, 1980. The gist of the appeal is whether or not moneys expended by the plaintiff taxpayer, in 1976, for the purpose of seeking the leadership of the Saskatchewan Liberal Party should be treated as a deduction for income tax purposes.

The main contention is that the expenditure of $24,000 ($10,550 of which is attributable to the 1976 taxation year) was incurred for the purpose of producihg business income. The moneys were expended for items such as: travelling incurred in the course of campaigning; production of pamphlets, policy and position papers; the production of a promotional film and posters; provision of a hospitality room at the leadership convention; office and telephone costs attributable to the leadership campaign.

Evidence was given that the leader was chosen by vote of the delegates present at the convention. One half of these delegates attended because of the position they held in the Liberal Party (eg members of the provincial executive, senators, members of Parliament and the provincial legislature); the other half was chosen by the riding associations as representatives of those associations.

Evidence was given that the leader of the Liberal Party could expect to receive between $20,000 to $40,000 per year from the party regardless of whether he was elected as a member of the provincial legislature or not. According to Mr Merchant these payments were not regular or periodic in nature but would have been made over the course of the year somewhat sporadically. As to the exact amount the leader would receive, according to Mr Merchant this was variable depending upon the previous lifestyle of the leader. It would also appear to depend upon the financial health of the party and presumably on the extent to which a leader might be independently wealthy. Evidence as to exactly how the amount to be paid is settled upon was somewhat unsatisfactory. Mr Merchant stated that usually the treasurer made a recommendation to a committee of which the leader would be a member but that the amount to be paid was not a subject of negotiation.

The plaintiffs argument proceeds as follows: (1) the moneys paid by the party to the leader are taxable, therefore they must fall within one of the categories of income set out in section 3 of the Income Tax Act (employment, property, office or business); (2) the income is not earned as an employee since the leader is not under the control of an employer; (3) the income is not from property; (4) the income is not from an office because subsection 248(1) of the Income Tax Act describes such income as being of a “fixed and ascertainable nature”; (5) therefore, the income must be from a business; (6) start-up costs are validly deductible as a business expense and similarly the campaign expenses incurred in at- tempting to get into the business of being leader of the Liberal Party of Saskatchewan should be deductible from the taxpayer’s income.

Counsel for the defendant had some difficulty classifying the income in the hands of the leader of a political party as income flowing from either the holding of an office or the conducting of a business; he noted that the description of income in section 3 is not an exhaustive one and that Division D of the Act deals with income outside the four categories specifically enumerated in section 3.

3. The income of a taxpayer for a taxation year ... is his income for the year ... including, ... his income for the year from each office, employment, business and property, (italics added)

In any event, counsel for the defendant argued that however the income in the hands of the leader should be categorized, the campaign expenses could not be classified as deductible expenses because they were incurred before the business of being leader ever commenced; they were not directly attributable to the operation of that business; they were not directly related to the earning of business income as that concept has been defined in The Royal Trust Company v MNR, [1957] CTC 32; 57 DTC 1055.

It is clear that the income in the hands of the leader is neither employment nor property income. Relying on the ordinary sense of English words would dictate that the remuneration should be classified as income from the holding of an office.

But subsection 248(1) provides that for the purpose of the Income Tax Act '.

office ‘means’’ the position of an individual entitling him to a fixed or ascertainable stipend or remuneration and includes a judicial office, the office of a Minister of the Crown, the office of a member of the Senate or House of Commons of Canada, a member of the legislative assembly or a member of a legislative or executive council and any other office, the incumbent of which is elected by popular vote or is elected or appointed in a representative capacity and also includes the position of a corporation director; ...

I agree with the argument of counsel for the defendant that the list of enumerated sources is not an exhaustive one. It is prefaced by the word “includes”. I also agree that the office of the leader of a political party is of the same genus as those specifically listed even though he is not elected by popular vote and is probably not elected in a representative capacity. On this latter point, while the leader undoubtedly represents the party in a number of ways he will, as leader, determine policy and “lead” rather than being answerable to the party as someone in a representative capacity. That having been said, however, the position of a leader of a political party is clearly of a kind similar to those specifically enumerated.

In the opening words of the definition of “office” in subsection 248(1), however, are not inclusive in nature; they impart a mandatory aspect to the definition. In order to be classfied as income from an office the remuneration must be fixed and ascertainable.

I was referred to the decision of the Tax Appeal Board in MacKeen v MNR, [1967] Tax ABC 374; 67 DTC 281 in which it was held that a person appointed to a royal commission was not an office holder for income tax purposes. The terms of his appointment were that he would be paid $100 per day as well as $20 per day while absent from his home and his actual out of pocket transportation costs. The Tax Appeal Board held that the income he received was business income and not attributable to the holding of an office. This decision was reached for a number of reasons (eg the position of commissioner was not a per- manent one and the taxpayer had agreed, at the time of his appointment, to the travel expense amounts provided for by the government). Accordingly, I do not place too much emphasis on that part of the judgment which held the taxpayer’s income not to be ascertainable. Indeed, I think such income is ascertainable. I take that word to mean that the amount to be paid is capable of being made certain, or capable of being determined but not that a definite sum be known by the office holder at the commencement of holding office. The word has to have some meaning beyond “fixed” or else it is completely redundant.

The decision in Guérin v MNR, 6 Tax ABC 77; 52 DTC 118, by the Tax Appeal Board, was also cited to me. In that case, income received by a judge who temporarily ceased acting in a judicial capacity and took up sitting as a chairman of various arbitration boards was not held to be income from an office. In that case, the taxpayer was paid a stipulated amount for each sitting but there was no way of knowing the number of sittings any given board would have nor the number of the boards on which the appellant would sit.. The Tax Appeal Board held that as long as the number of sittings was indeterminate, the remuneration for the office could not be said to be ascertainable and therefore the income must be treated as business income, at 89 [121]:

By “position entitling one to a fixed or ascertainable stipend or remuneration” parliament, in my opinion, meant a position carrying such a remuneration that when accepting it a person knows exactly how much he will receive for the services he is called upon to render . . .

I am not convinced that at the time of taking office the taxpayer must know how much he will receive. It seems to be a per diem rate, or a specified amount per sitting renders the income sufficiently ascertainable to meet the definition in subsection 248(1). However, there are other factors in the Guérin case which make the income unascertainable and in my view should have served as the focus of that decision:

It has been established that the appellant must himself pay for the services of a part-time secretary and that he must also pay for the stationary [sic] he needs, for the use of a typewriter and all other supplies .. . It has been further established that the appellant is often called upon to pay the transportation of his secretary and other persons acting as advisers and that oftentimes he has to pay for the meals of his assistants and advisers.

These it seems to me are the crucial factors in making the remuneration received, as a result of holding the position of arbitrator, not ascertainable.

From the evidence given in the present case it is hard to determine whether the sums paid to the leader are ascertainable as that term is used in subsection 248(1). They would appear to be determined annually as some sort of fixed figure. There is no evidence given that the leader has variable expenses to pay out of that income for the purposes of earning it as was the case in the Guérin decision. Yet, from the evidence given, it cannot be said that the leader knows before taking office, with any degree of certainty, what the amount will be. It may very well be that each occasion is different, depending upon the leader and the circumstances in question. It may be that the evidence is so unsatisfactory here because Mr Merchant is talking about a situation which he expected he would be in but which never materialized. Evidence from the person who actually became leader as to how his stipend was actually arrived at would have been helpful.

In any event, on the basis of the evidence before me, I will proceed on the assumption that if Mr Merchant had won his leadership campaign the amount he would have received would not have been ascertainable as that term is used in subsection 248(1).

I agree with counsel for the plaintiff that if the income in the hands of the party leader is not classified as income from an office, it probably falls under the heading of business income. I note that the definition of business in subsection 248(1) is broad enough to include both employment and the holding of an office. This seems to follow from the fact that these two sources of income have been expressly excluded from the definitions of business in the Income Tax Act.

“business” includes a profession, calling trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), an adventure or concern in the nature of trade does not include an office or employment. (italics added)

Counsel for the plaintiff then argues that while the campaign expenses would not have been deductible had the ultimate income payable to a leader been income from an office, they are deductible since that income is income from a business. This is the interpretation he would put, for instance, on Decelles v MNR, [1978] CTC 2018; 78 DTC 1019 where the Tax Review Board held that expenses incurred by a city councillor in running for election were not deductible. The Board, at 2018 [1020], held that:

.. .the said expenses were not incurred for the purposes of gaining or producing income from a business or property by virtue of subsection 8(2) of the Act, and I quote:

Except as permitted by this section, no deductions shall be made in computing a taxpayer’s income for a taxation year from an office or employment.

According to the evidence adduced, there is no way that the activities of the taxpayer can be considered as a business before his election as councillor. Consequently, the appellant cannot be allowed to deduct from his salary the expenses incurred in a municipal election in order to become a city councillor.

In addition it is clear that expenses are deductible even if no income is ever earned. In MP Drilling Ltd v MNR, [1974] CTC 426; 74 DTC 6343 it was held that expenses incurred in constructing facilities and conducting negotiations for the purpose of getting into the business of marketing liquid petroleum were deductible even though the business never got off the ground. Equally, in MNR v Freud, [1968] SCR 75; [1968] CTC 438; 68 DTC 5279 the Supreme Court of Canada allowed the deduction of expenses incurred in developing a prototype sports car even though marketing the car or selling rights to the prototype were never successful. More speculative still, in Tobias v The Queen, [1978] CTC 113; 78 DTC 6028 a taxpayer was allowed to deduct expenses he incurred in searching for treasure on Oak Island, Nova Scotia. The search was, of course, unsuccessful but the Court held that had it been otherwise, the profit made would have been taxable; thus, the expenses incurred in the unsuccessful search were held to be equally deductible.

Lastly, the plaintiff argues that an analogy should be drawn to those cases which have allowed the deduction of start-up costs of a business. He referred to MP Drilling Ltd v MNR, (supra), and to Interpretation Bulletin IT-41R issued by the Department which provides:

Pre-production or start up costs of a new business, to the extent they are not capital outlays, must be claimed in the year in which they are incurred.

Counsel for the defendant’s main argument was that even if the amounts paid to a party leader were characterized as business income, leadership campaign expenses were simply too remote to be deductible. His argument was that they were expenses incurred before the operation of the business began, citing in support of that contention the Decelles case, (supra), and Daley v MNR, [1950] CTC 254; 50 DTC 877. In the Daley case, fees paid by a lawyer in order to obtain a call and admission to the Ontario Bar were disallowed as business expenses. In coming to this decision President Thorson said at 880:

The fee of $1,500 which he paid for his call to the Bar and admission as a solicitor in Ontario was an expenditure that was anterior to his right to practice law in Ontario and earn an income therefrom. Except that it was nearer in point of time, it was not more related to the operations, transactions or services from which he earned his income in 1946, or in any year, than the cost of his legal education would have been or, for that matter, the cost of his general education or any cost or expense involved in bringing him to the threshold of his right to practice. . . . It seems clear that a disbursement or expense such as this which is laid out or expended not in the course of the operations, transactions or services from which the taxpayer earned his income but at a time anterior to their commencement and by way of qualification or preparation for them is not the kind of disbursement or expense that could be properly deducted in the ascertainment or estimation of his “annual net profit or gain”. In my view, no accountant or business man could so regard it.

Since the Daley decision in 1950, as counsel pointed out, the scope of what is admissible as a legitimate business expense has been enlarged. No longer is it necessary to prove that the expense was “wholly, exclusively and necessarily laid out or expended for the purpose of earning the income” as was the case pursuant to section 6 of the Income War Tax Act. The relevant provision, paragraph 18( l)(a) of the Income Tax Act now provides:

In computing the income of a taxpayer from a business ... no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the

taxpayer for the purpose of gaining or producing income from the business . . .

This enlarged scope of deductible expenses is demonstrated in The Royal Trust Co v MNR, (supra), where club dues for executives and senior personnel of the appellant company were held to be deductible business expenses. The purpose of the expenses was to increase the appellant’s business through personal contacts. See also Randall v MNR, [1967] CTC 236; 67 DTC 5151; MP Drilling Ltd v MNR (supra); Lalande v MNR, [1980] CTC 2992; 80 DTC 1862; and Frappier v The Queen, [1976] CTC 85; 76 DTC 6066.

If the income received by a leader of a political party from that party is business income and not income from an office, then, it seems to me that the starting point must be similar to that found in Moldowan v The Queen, [1978] 1 SCR 480; [1977] CTC 310; 77 DTC 5213 at 486 [314] where the Supreme Court in listing the criteria to be used for determining whether “a reasonable expectation of profit existed” stated:

The factors will differ with the nature and extent of the undertaking: The Queen v Matthews. One would not expect a farmer who purchased a productive going operation to suffer the same start-up losses as the man who begins a tree farm on raw land.

Similarly, I think what is a deductible business expense will differ depending upon the nature and extent of the undertaking. I do not find it easy to draw a parallel between those cases which have dealt with the “start-up costs” of a business such as a petroleum marketing enterprise or a sports car producing enterprise and one such as the present where the ultimate income is closer in character to that received by an employee or an office holder than it is a business operation. A business operation usually has offsetting income and expense accounts.

More importantly, the expenses incurred by the taxpayer in this case are close to those incurred by someone seeking employment (eg travelling expenses for the purpose of meeting prospective employers) or a newly qualified lawyer seeking to purchase an ongoing law practice (expenses incurred in travelling, meeting and negotiating for that purpose) than they are to the start-up costs in the cases cited. In addition it could seem anomalous for someone who obtains income from holding an office comparable to that of a leader of a political party (eg those enumerated in the definition of office in subsection 248(1) not to be able to deduct his campaign expenses) while a party leader because his remuneration was unascertainable (if this is really the case) could do so.

In my view, even though the scope of deductible expenses has been broadened since the Daley decision, (supra), I think the expenses incurred by the taxpayer in this case are appropriately characterized as being anterior to the commencement of the business with respect to which they are claimed. Unlike the situation which exists in the case of start-up costs of a business, there is a lack of continuity between the activity of running for the leadership and operating as a leader. Also significant is the fact that it is not in the hands of the leadership candidate to determine whether he will ever get into the business of being leader or not. In the Tobias case, (supra), the decision to discontinue or continue treasure hunting was in the hands of a taxpayer. Similarly in MP Drilling Ltd, (supra), and MNR v Freud, (supra), the continuation or not of the business activity

was a matter within the control of the taxpayer. But the position of candidate for leadership of a political party is vastly different. He is seeking election to a position; his campaign activities are clearly anterior to and separate from any business of leadership he might eventually get into should he win the election.

Accordingly the action will be dismissed.